November 17, 2004 10:09 AM
A Bond Strategy Once Thought Foolish Now Looks Smart
Excerpt: WITH the year drawing to a close, it is a good time to review the fates of those risk-averse investors who stuck with the bond market in 2004, despite warnings that interest rates would climb sharply. Those contrarians don't look so silly at the moment, and even though interest rates are again forecast to rise in the coming year, conservative investors may not do too badly by holding onto bonds.
WITH the year drawing to a close, it is a good time to review the fates of those risk-averse investors who stuck with the bond market in 2004, despite warnings that interest rates would climb sharply.
Those contrarians don't look so silly at the moment, and even though interest rates are again forecast to rise in the coming year, conservative investors may not do too badly by holding onto bonds.
Going into 2004, investors who planned on leaving any money in bonds, especially in the Treasury market, looked as if they were clinging to a bad strategy. The Federal Reserve was poised to begin raising its short-term interest rate, many analysts said, and the economy was expected to pick up steam.
If interest rates surged, Treasury prices would plunge. Some economists even predicted that yields on the Treasury's 10-year note could rise as high as 5.6 percent, according to forecasts gathered by Blue Chip Economic Indicators. A few forecasts suggested that the Treasury market could have a year almost as bad as 1994, when Fed rate increases lead to a 3.3 percent loss in the Treasury market.
If you were in the fixed-income market this year, investment grade corporate bonds and high-yield junk bonds were the places to be, analysts said, because their higher yields would offset price declines as rates rose.
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